Gender diversity improves private equity and venture capital returns

13 May 2019 Consultancy.uk

Investment teams working in PE/VC remain largely male-dominated, with less than 30% of the sector’s workforce being women. However, new analysis has highlighted how improved gender diversity in the industry could boost results, further highlighting financial as well as social dimensions to improving gender diversity.

Europe’s private equity market has reached its highest level in a decade. The number of deals climbed 5.3% to 2,168 deals, together generating €262 billion in deal value, up 9% year-on-year. Meanwhile the venture capital sector is also booming, with a whopping $71 billion invested by the industry in start-ups in the first three months of 2019 alone, a global increase of more than 20%.

While the private equity and venture capital scenes are enjoying high levels of growth, however, they remain infamous for their short-termism. With delivering the largest profits possible in the shortest time before exiting a company they have invested in, the sectors are not known for their desire to plan for the long-haul – something which also impacts how private equity and venture capital firms structure themselves internally. As a result, while there is currently an onus on businesses across the industrial gamut to improve their gender balance, it is something which has struggled to filter through to this area.

Performance of Emerging Market Funds, Excess Net IRR to Relevant Benchmark given Vintage Geography and Strategy

However, things are finally beginning to change, according to a new study from Oliver Wyman. This is because, while there are many positive social outcomes of improving the representation of women across business, a growing body of evidence suggests that business performance in diverse teams appears to simply be better than teams without diversity. With financial results at stake, even the investment market can no longer afford to ignore the potential of improving its gender balance.

The analysis of data from more than 700 PE/VC funds and 500 portfolio companies found that there is positive correlation between diverse leadership teams and the performance of their funds. Gender-balanced teams have median excess internal rate of return (IRR) of 1.7%, while all-male teams have median excess IRR of -0.1%. When considered against the median fund performance of 8%, the difference between gender-diverse and mono-gender teams is 20% improvement in median performance.

Performance of emerging market funds by strategy – by male/female unbalanced and balanced teams

The study found that VC funds tend to have performance improvements with diverse teams, particularly in emerging markets. In the emerging markets VC space the study showed a 4.5% increase in returns relative to male- or female-dominated teams, with median 3.9% increased growth to -0.6% to the median. When it came to equity and buyout fund performance, diverse teams had a 1.6% premium to the median, compared to no premium for all-male or all-female teams. Finally, for real asset funds, diverse teams enjoyed a 1.3% premium on the market median compared to no increase for male- or female-dominated teams.

In addition to improved IRR performances, the study also found that total value to paid-in (TVPI) multiples was improved if the investment team was balanced between men and women. The premium for performance of emerging market funds, excess net TVPI to relevant benchmark given vintage, geography and strategy stood at 0.17x for 30-70% female teams, well above the 0.01x noted for 10-30% female teams and the -0.03x noted for <10% teams.

Performance of emerging market funds TVPI – by male/female team makeup

In terms of the performance of emerging market funds by strategy, excess net TVPI to relevant benchmark given vintage, geography and strategy, the study again found a strong correlation between the number of women on teams (gender balance) and outcomes. For venture capital funds, the result shows a difference of 0.2x, while for growth equity and buyout funds a difference of 0.18x is noted. Finally, for real asset funds, median performance premiums of 0.14x were garnered.

Commenting on the study, authors Julia Hobart, Samir Misra and Dominik Treeck said, “We find that the gender gaps in the representation of women as allocators and recipients of capital put access to financing at risk for female entrepreneurs and may reduce investment returns for funds. Given that private equity and venture capital are still nascent in many emerging markets, changes made now can have a significant impact in the long run to move the industry toward gender balance.”


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